Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris MacCulloch saw little for investors to be concerned about in Suncor Energy Inc.’s (SU-T) second-quarter financial report.
“The age-old adage that ‘no news is good news’ clearly rang true for SU after its 2Q23 financial results lacked major surprises, much to the satisfaction of the investment community, which appeared to have already penciled in downward revisions to corporate guidance,” he said. “In fact, the tone of the conference call was downright upbeat, with a renewed sense of focus and optimism that better days lie ahead following a challenging period for the company, culminating most recently with the cybersecurity breach. Operationally, there is reason to support that view, with oil sands production poised to accelerate in 4Q23 following planned turnarounds at Fort Hills and Syncrude, while downstream maintenance has largely concluded for the year, thereby allowing SU to fully capitalize on strengthening crack spreads.
“Meanwhile, President and CEO Rich Kruger appears to have taken stock of the organization after visiting all major operational centres and reviewing corporate procedures from top to bottom in recent months, implementing several changes to improve focus along the way. However, Mr Kruger also foreshadowed potential headwinds, hinting that production guidance could be reassessed on the back of 3Q23 results. With respect to the consolidation of Fort Hills through the proposed acquisition of TotalEnergies Canada, Mr Kruger noted that resolution prior to year-end was a reasonable working assumption. That said, we are unlikely to see a full replacement plan for Base Plant within that timeframe, which could remain a headwind for the stock after SU recently lost Surmont to ConocoPhillips.”
In a research report titled Nothing new under the sun, Mr. MacCulloch trimmed his production forecast to the lower end of the company’s guidance while also lowering his forward growth assumption. That led him to cut his cash flow per share estimates for 2023 and 2024 to $9.34 and $11.25, respectively, from $9.45 and $12.06.
“We have also removed the proposed acquisition of the remainder of TotalEnergies Canada for $1.5-billion until we have greater clarity on the transaction,” he said.
Maintaining a “buy” recommendation for Suncor shares, he cut his target to $48 from $50. The average on the Street is $49.83, according to Refinitiv data.
Elsewhere, RBC Dominion Securities analyst Greg Pardy maintained an “outperform” rating and $49 target for Suncor, which is on the firm’s “Global Energy Best Ideas” list.
“With a recharged executive leadership team under the direction of new CEO Rich Kruger now in place, Suncor is poised to reestablish operating and financial momentum in the months to come, which should translate into relative share price appreciation over time,” said Mr. Pardy.
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Raymond James analyst Brad Sturges expects Nexus Industrial REIT (NXR.UN-T) to use the proceeds of non-core asset sale to strengthen its balance sheet.
However, emphasizing the timing of such transactions is “uncertain,” he lowered his rating for its units to “outperform” from “strong buy,” which he said balances its “relative discount valuation, with the REIT’s near-term investment risks associated with asset sale execution and floating interest rate exposure.”
“Nexus noted on its 2Q23 call that it is having discussions with interested parties to sell its 50-per-cent interest in its Quebec Sandalwood portfolio, which may generate gross proceeds of over $100-million,” said Mr. Sturges in a note titled Positive Catalysts Become Clear. “Nexus will also consider selling non-core industrial assets in Western Canada. Gross proceeds generated from executed non-core asset sales are expected to be used to repay floating rate debt charged on its unsecured credit facilities (21 per cent of total debt). If successful, Nexus is targeting to reduce its debt to GBV assets ratio down in to the low 40-per-cent range (vs. 48 per cent at June 30).”
“Nexus has executed $275-million in Canadian industrial acquisitions in 2023 year-to-date, which have been funded mainly by $245-million in capital drawn from the REIT’s unsecured credit facilities. As a result, Nexus’ exposure to floating rate debt has risen to approximately 21 per cent of its total debt (vs. 6 per cent at the end of 2022).”
The downgrade comes following Monday’s release of largely in-line second-quarter results, including normalized fully diluted funds from operations of 18.5 cents per unit, down from 20 cents during the same period a year ago.
Trimming his 2023 and 2024 financial expectations, Mr. Sturges cut his target for Nexus units to $10.75 from $12. The average is $11.13.
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Citi analyst Itay Michaeli raised his earnings expectations for Magna International Inc. (MGA-N, MG-T) through 2024 in response to its second-quarter results, which he said were “solid but contained some mixed puts/takes within the H2 outlook.”
His fiscal 2023 earnings per share projection jumped to US$5.32 from US$5.06, while his 2024 expectation jumped to US$6.72 from US$6.62.
Maintaining a “neutral” recommendation for Magna shares, Mr. Michaeli increased his target to US$61 from US$59, touting its “strong positioning and relative defensiveness.” The average on the Street is US$67.75.
“We remain Neutral-rated on what we regard as generally balanced risk/reward from here,” he said. “In terms of next events/catalysts, the company will host a Virtual Investor Update on Sept 7th, where we expect a focus on key megatrends including the recent Veoneer ADAS acquisition. Given Magna’s higher North America exposure, the stock could experience added near-term volatility tied to potential U.S. automaker labour disruption in Sept.”
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While “encouraged” by Chemtrade Logistics Income Fund’s (CHE.UN-T) second-quarter earnings beat, Desjardins Securities analyst Gary Ho said “the implied softer 2H23 and questions around sustainability in 2024 give us some pause.”
“”2H23 could see lower caustic soda prices, a weaker pulp industry impacting sodium chlorate and higher turnaround activity,” he said. “2024 will face tough comps in 1H and a North Vancouver turnaround in 2Q.”
On Monday, the Toronto-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $144-million, exceeding both Mr. Ho’s $115-million estimate and the consensus projection of $116-million. However, the analyst’s attention was focused on an implied second-half EBITDA guidance of $174-million, below his $210-million projection, which fell in line with the Street.
“We believe it will take some time for investors to digest the swing in results given the moving pieces,” he said. “We reduced our 2024 EBITDA to $388-million (was $400-million), driven by a more tepid outlook.”
With his forecast reductions, Mr. Ho cut his target for Chemtrade shares to $11.50 from $13.25, keeping a “buy” rating. The average is currently $11.57.
“Our positive view is based on: (1) multiple chemicals in CHE’s portfolio having relatively recession-resistant attributes; (2) tremendous ultra-pure and hydrogen opportunities; and (3) consistent execution and a repaired balance sheet should restore investor confidence and warrant a valuation re-rate,” he concluded.
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Following better-than-expected second-quarter results, National Bank Financial analyst Endri Leno thinks investors are not currently giving DRI Healthcare Trust (DHT.U-T, DHT.UN-T) credit for its current portfolio nor pricing in further growth.
“Thus, in addition to the multiple (macro and company-specific) tailwinds and the defensive nature of pharmaceutical royalties, we find the units fundamentally undervalued prompting an Outperform rating,” he said in a research note titled Continues to Execute.
With its Monday earnings release, the Toronto-based company announced the acquisition of a second royalty stream in breast cancer treatment of Orserdu for US$130-million from Radius Health. It entitles DRI to a low-to-high single digit tiered royalty on global net sales. DRI is also entitled to receive milestone payments of up to US$40-million on sales performance thresholds.
“Following the second Orserdu royalty, DRI has now deployed approximately US$766-million into royalties and is, likely, one or two further deals away (pipeline deals in the US$75-US$150-million range) from achieving the high end of its US$850-US$900-million deployment guidance,” said Mr. Leno. “While we believe there is a very reasonable probability that this guidance is increased (it would likely prompt us to revisit the growth portion of our NAV) post the next royalty acquisition, DRI is keeping it unchanged at the moment as it further evaluates pipeline opportunities.”
Believing DRI’s pipeline “remains robust,” he added: “The current pipeline is valued at US$2.8-billion with some 28 opportunities of which 16 are near term (could close in 6 months) and valued at US$1.8-billion. The remaining 12 opportunities are longer term and valued at US$1-billion. We would not be surprised to see some near-term opportunities having moved to exclusivity by the Q3 update in Nov. 2023.”
After adding the second Orserdu valuation to his forecast, Mr. Leno raised his target for DRI shares to US$11.75 from US$11.50, reiterating his “outperform” recommendation. The average on the Street is $18.64 (Canadian).
Elsewhere, Raymond James’ Rahul Sarugaser raised his target to $21 (Canadian) from $20 with an “outperform” rating.
“DRI is now on offense, hunting home runs,” said Mr. Sarugaser. “With about $125-million of credit and cash to draw on in order to execute its pipeline opportunities, we believe DRI is reasonably well-capitalized for the short-term, but will need to tap the equity or debt markets in the medium-term to continue its strong transaction cadence. With a leverage ratio below 3x today, DRI has plenty of capacity.”
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Following the sale of the majority of its remaining pipe coating division to Tenaris S.A. for US$160-million, National Bank Financial analyst Zachary Evershed sees Mattr Infratech (MATR-T) “perfectly positioned to take advantage of a lengthy list of organic growth opportunities, as expected, whilst simultaneously returning more capital to shareholders.”
“Management anticipates regulatory clearances will take approximately 6 months, pushing the closing date 45 days into 2024,” he said. “However, all pre-close earnings from PPS will flow to Mattr, which may be a modest positive with respect to the company’s valuation as MATR should now capture most of the highly profitable SGP coating contract, expected to wrap up in Q1/24. Our 2024 forecasts move up slightly on this basis, while our 2023e forecasts drop in the accounting exercise as we shuffle PPS down to discontinued operations.”
Mr. Evershed now sees the only asset “of any merit” that remains to be sold in the PPS segment is a “going concern” in Brazil, though he noted it generated less than 10 per cent of segment sales over the last 12 months.
“Management indicated the sale price of Brazilian operations would ultimately be immaterial, but as the recently disclosed sales in Italy and the UK were also considered immaterial, we estimate a transaction could sport a price tag in the high single digit millions of dollars: the divested pipe coating facility in Ellon, Scotland went for $0.5 million, and the agreement to sell a facility in Pozallo, Italy was for $6.5 million,” he said. “However, given the lack of certainty on the value and timing of realization, we elect to exclude potential incremental sale proceeds from our valuation methodology.”
Based on his revised divestiture expectations, including incremental cash flow from the sale and movements in foreign exchange, Mr. Evershed raised his target for Matr shares to $25 from $24.50. The average is $22.83.
“Given the clear potential for continued sustainable growth, a clean balance sheet, and the successful ongoing simplification of the business, we reiterate our Outperform rating,” he said.
Elsewhere, other analysts making adjustments include:
* TD Securities’ Aaron MacNeil to $20 from $19 with a “hold” rating
* Cormark Securities’ David Ocampo to a Street-high $26.50 from $26 with a “buy” rating.
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In other analyst actions:
* In a report titled Land of Plenty: Quality Inventory + High Growth Focus Should Bode Well for Investors, Raymond James’ Jeremy McCrea initiated coverage of Logan Energy Corp. (LGN-X) with an “outperform” rating and $1.50 target. The average is $1.74.
“Over the past decade, we have observed a limited number of management teams that can point to a track-record of M&A success and a capacity to generate meaningful value for shareholders,” he said. “With insiders owning 21 per cent of the company, and a goal of growing production 50 per cent per year (for the next several years), there is considerable alignment for growth oriented investors. Operating solely within the Montney, where scarcity of high quality assets have become more apparent (given recent land sale bids/transactions), Logan possesses 500+ identified Montney locations across 300+ net sections of land. Although LGN looks relatively ‘expensive’ on traditional valuation metrics (EV/FCF, EBITDA, etc), thus lies the opportunity. For ‘land exploration’/’early stage’ companies, the high growth potential should be looked at through a different lens, via establishing the value of what investors might/should pay for Logan’s undrilled Montney acreage. Taking the EV less PDP, investors are currently paying $425-million for LGN’s undrilled land today. Part of the leap we think investors will need to take (and risk), is how modern frack designs will change type-curve economics (with most of LGN’s land not seeing a well drilled for 5+ years now). Nevertheless, based on off-setting competitor results, we believe investors are likely paying for less than 10 per cent of Logan’ inventory today (much less than many of its peers). If Logan is able to execute and successfully showcase well results utilizing modern day completion technology, we think there is more upside than what the current share price shows. Overall, with a positive starting cash balance, an experienced management team, and plenty of growth and inventory ahead, we initiate coverage with an Outperform rating.”
* BMO’s John Gibson lowered Anaergia Inc. (ANRG-T) to “underperform” from “market perform” without a specified target.
“ANRG’s Q2/23 results were below expectations, while the company also removed its 2023 financial guidance,” he said. “More concerning, ANRG noted that loans related to Build, Own, Operate (BOO) assets in Italy may be required to be purchased by the company. Given ANRG continuing at a going concern is at significant risk, we are downgrading the shares.”
He added: “While ANRG has entered a strategic review process, we believe significant risk lies with the shares given the potential for lender repayments in Italy, as well as the ongoing RBF dispute. Post quarter, our 2023 and 2024 EBITDA estimates decline to negative $32 and negative $25 million, respectively (negative $1 and positive $16 million prior).”
* Raymond James’ Farooq Hamed lowered his target for Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to US$67 from US$72 with an “outperform” rating and raised his target for First Quantum Minerals Ltd. (FM-T) to $35 from $32 with a “market perform” rating. The averages are US$66.60 and $36.51, respectively.
* Desjardins Securities’ Lorne Kalmar cut his Automotive Properties Real Estate Investment Trust (APR.UN-T) target to $12.50, below the $12.59 average on the Street from $13 with a “hold” rating.
“While the REIT’s business model has proven to be resilient, its relative valuation (vs both LTA and peers) and the tempered near-term acquisition outlook keeps us on the sidelines for now,” he said.
* Scotia’s Himanshu Gupta trimmed his BSR REIT (HOM.U-T) target to US$17 from US$18 with a “sector outperform” rating. The average is US$17.54.
“Based on our model, SS NOI and FFOPU growth should bottom out in Q4/23 and then show decent growth in 2024,” he said. “While valuation has mostly re-set, market attention is still fixated (rightly or wrongly) on the pace of rent deceleration. With elevated bond yields (US10YR more than 4 per cent), there is some hesitation for market to own deceleration stories right now. We think, by Super Bowl (say around Feb’23), we will begin to see an inflection point with respect to both organic growth and earnings. This is when we think unit price should resume its upward journey. Apart from easy comps, we also see real estate taxes reduction in Texas as a positive catalyst.”
* Jefferies’ Owen Bennett cut his targets for Canopy Growth Corp. (WEED-T, “hold”) to 59 cents from 61 cents and Cronos Group Inc. (CRON-T, “hold”) to $2.61 from $2.63. The averages are 85 cents and $3.58, respectively.
* Stifel’s Matthew Sheerin raised his Celestica Inc. (CLS-N, CLS-T) target to US$24 from US$20 with a “hold” rating. The average is US$23.33.
“We hosted investor meetings today with Celestica’s CFO, Mandeep Chawla,” said Mr. Sheerin. “The EMS company has attracted much investor interest in the last two quarters, given its strong topline growth across most of its business segments, and record operating margins (expected to be 5.5 per cent this year, up 135 basis points in the last two years). Of most interest was Celestica’s growing position with hyperscale cloud providers, which now account for $2.5-billion in sales, and how CLS is positioned and differentiated vs. Asia-based ODMs and traditional EMS competitors. We highlight details on the various end market segments, as well as thoughts on CLS’s 10-per-cent EPS guide for FY24, which could end up being conservative. Alhough Celestica has historically traded at a discount to most of its EMS peers, we believe its recent, impressive track record warrants at least an in-line multiple.”
* TD Securities’ Mario Mendonca cut his ECN Capital Corp. (ECN-T) target to $2.75, below the $3.45 average, from $3.50 with a “hold” rating.
* TD Securities’ Arun Lamba moved his Filo Corp. (FIL-T) target to $29 from $30, keeping a “speculative buy” rating. The average is $32.21
* Scotia’s Mario Saric reduced his H&R REIT (HR.UN-T) target by $1 to $13.25 with a “sector perform” rating. The average is $13.13.
“We think H&R’s 12-per-cent year-to-date underperformance vs. the CAD REIT sector represents a better entry point for longer-term investors, but barring near-term accretive dispositions surprising materially to the upside, we think catalysts are weighted to 2024 and patience is required, particularly as U.S. Sun-Belt Residential rent growth moderates (Lantower remains key to overall H&R sentiment),” he said. “We think the stock looks cheap but may continue to be so heading into Q3 results.”
* Scotia’s Ben Isaacson raised his Lithium Royalty Corp. (LIRC-T) to $21 from $20 with a “sector outperform” rating. The average is $20.96.
“We expect to see LIRC out-perform near-term, as the market begins to debate/digest the valuation implications of a significant court ruling in favour of LIRC,” he said. “Our quick/dirty first stab of the math is +$5/sh, but this estimate is high-level and will require refining as the story moves to the next chapter. What is the story? Simply put, LIRC and Orion signed an agreement whereby LIRC would purchase 85% of a royalty (on LAC’s Thacker Pass project) from Orion. Before the agreement could be executed, Orion had sold 60 per cent of the royalty to Trident Royalties. What makes this so interesting is that LAC’s Thacker Pass project boasts the largest lithium resource in the U.S., with construction already underway. Thacker Pass will be one of the next world-class/scale lithium projects globally, with capacity of 80k mt equivalent to more than 11 per cent of global lithium demand in ‘22. But, this next chapter could see appeals by Orion, or perhaps a short to a painfully long negotiated settlement for damages. We just don’t know yet, but +$5/sh is our starting point until we learn more.”
* Credit Suisse’s Andrew Kusje lowered his Pembina Pipeline Corp. (PPL-T) target to $51, below the $51.31 average, from $52 with an “outperform” rating.
“On August 3rd , Pembina Pipeline Corporation (PPL) reported Q2 2023 results that missed expectations by rather narrow margins,” he said. “For the most part, the print was reasonable in the context of specific issues that included reduced pressure on the Northern Pipeline System (telegraphed earlier – with cascading impacts), commodity price volatility and wildfire related volume losses. Very simply, we retain a favourable bias for the Western Canadian regionally exposed energy infrastructure assets largely owing to natural gas and NGL dynamics. For PPL, continued growth exists across a broad ecosystem that still can ‘fill in white space’ between wellhead and export terminals. With that background, Western Canada’s unique volumetric growth potential combined with rather attractive risk-adjusted returns in processing, fractionation and some other spread related businesses are core to a positive PPL viewpoint.”
“PPL’s regional midstream assets in the Western Canadian Basin help underpin critical energy activities and are poised to benefit from both volume and margin expansion. Moreover, the core commodity exposure (i.e., frac related) looks positive for PPL.”
* RBC’s Darko Mihelic raised his Sagicor Financial Company Ltd. (SFC-T) target to $8 from $6 with an “outperform” rating. The average is $9.
“SFC’s Q2/23 adjusted results were below our estimates but not by much on a core basis. SFC will be reporting core results by segment soon. Meanwhile, we make some adjustments to our model to better fit guidance (and having seen Q1/23 for Ivari now under IFRS 17 we have some added confidence). We correct our book value per share estimate to properly include negative goodwill on closing of Ivari (which we assume occurs on September 1). Our estimates heavily rely upon guidance — we adjust our risk premium higher. Higher BVPS [book value per share] still results in a higher PT.”
* Eight Capital’s Christopher True trimmed his Saturn Oil & Gas Inc. (SOIL-T) target to $5.65 from $6.50, keeping a “buy” rating. The average is $5.91.
“We are reducing our price target on the heels of SOIL’s Q2/23 update,” he said. “Our expectation is that Saturn will have to push out its target of producing at a 30 MBOE/d run rate while it focuses on debt repayment on the near term. Our lower price target is a result of our production estimate being reduced and capex being pushed further out.”
* RBC’s Pammi Bir raised his target for Sienna Senior Living Inc. (SIA-T) to $14 from $13 with a “sector perform” rating. The average is $13.71.
“On the back of results that exceeded our call, our outlook on SIA continues to improve.,” he said. “After a difficult few years, the operating environment is stabilizing across the LTC and retirement platforms, providing a firmer foundation for earnings to recover. Importantly, an acute focus on cost control initiatives is paying off, particularly in labour, while SIA’s effective sales and marketing programs should continue to support incremental occupancy advances. On balance, we think valuation reasonably captures an improving growth trajectory.”
* Desjardins Securities’ Benoit Poirier cut his Titanium Transportation Group Inc. (TTNM-T) target to $7 from $7.25 with a “buy” rating. The average is $5.55.
“While the results and management’s comments do not change our view on the long-term accretion of the Crane acquisition, our estimates (and the Street) were likely overly optimistic on the short-term end of our EBITDA forecast following three straight quarters of 20-per-cent-plus margin,” he said. “We now forecast TT [Truck Transportation] segment EBITDA margin of 15.5 per cent in 3Q, 14.8 per cent in 4Q and 17.8 per cent for the year (was 19.1 per cent), driving EBITDA of $35.7-million. We expect a bounce-back in 2024 to 18.2 per cent once the bulk of the integration/optimization is completed.”
“We believe TTNM’s shares offer good value for long-term investors at the current level of only 3.7 times EV/FY2 EBITDA.”
David Leeder